While business owners play a pivotal role, they generally understand the importance of employees too. There are several ways that employees can be rewarded. For example, they may receive a salary increase or bonus. They may be sent on a family vacation.
Sometimes, business owners can trust key employees to the extent that they want them to take on an ownership role through equity. What are some of the main advantages and disadvantages of this?
Advantages for each party
Sharing equity with an employee is indicative of a long-term working relationship. This benefits both the owner and the employee. The owner knows that their key team member is in it to stay. The key employee knows that they have security.
Handing equity over to a key employee can also boost the profitability of the company. Since they are taking home a profit share as their paycheck, the employee will be motivated to expand the business and impress clients.
Potential drawbacks
Sharing equity with a key employee does have potential drawbacks. For starters, it can dilute the ownership structure of the company. This can make things complicated in terms of tax obligations and profit sharing.
Things can also get complex if the employee changes their mind and wants to leave the company. It’s not as simple as them just handing in their notice. Their share of the business needs to be diverted to somebody else. This can take time and significant capital.
While sharing equity with a key employee can be beneficial, it’s a huge decision that requires due diligence. We help businesses who are looking to restructure. Contact us for a consultation to learn more about how we can help.